2017 has brought about a meteoric rise in cryptocurrency values. Bitcoin (BTC), the sector’s bellwether, is up over 1800% – it began the year at $963, and is currently trading over $18,000. Amazingly, that is nothing compared to the no.2 crypto Ethereum (ETH), which is up over 100 times higher, at a current price of about $845. A number of other cryptos have exploded in similar patterns to Ethereum, including Ripple (XRP), Litecoin (LTC), IOTA, Monero (XMR), and many others.
Many (including myself) have believed that the stock market has been extremely overvalued for quite some time, and ripe for a collapse. The cryptocurrency market is rivaling (and likely surpassing) the 1990’s dot-com bubble. It has certainly gotten into dangerous territory, and is due for a major correction.
Given the stronger state of today’s tech sector and emergence of internet e-commerce since the dot-com bubble burst, it can even be argued that the correction was necessary for the tech sector to remain viable. Could the same be true for cryptocurrencies?
With that in mind, let’s take a look at a long-term chart of the S&P 500:
The equity markets began to rally in earnest in the mid 1990s – we’ll call it the 460 area in July 1994, for simplicity’s sake. The dot-com bubble began in 1997, around the 760 area – we’ll call it 1,520 in March of 2000, again to keep it simple.
After the dot-com bubble burst, the S&P 500 reached a low around ~850, just above where the 1997 bubble started, and well before the 1994 rally began. Indexed to 1997, the loss is almost complete, but indexed to 1994, it marks a roughly 63% retracement from the 2000 highs. Bear in mind, 50-60% is the level that many technical analysts look for in “retracements” in market moves before entering or re-entering a position.
Though nearly all of the dot-com stocks went bust, the bubble led to the emergence of the FANG (Facebook, Amazon, Netflix, Google) stocks, in addition to many other big tech names that have flourished. It has been argued that the sector needed a major washout of the weaker players, so that the “survivors” could truly adapt a technology platform for success.
Sounds oddly familiar to what many are saying about cryptocurrencies, doesn’t it?
Again, with that in mind, let’s take a look at this year’s chart for BTC, which we will use as the “index” for the sector:
If you mark the “beginning” of the crypto bubble in 2017, and go with a similar 63% retracement to the S&P 500, Bitcoin would still be trading in the $6,300 range. Given the amount of “hot money” that has flown into the sector chasing outsized returns.
Even if you took the more aggressive approach and chose to look at the NASDAQ Index, which gave up all of its dot-com era gains (and then some), it could be argued that it was a necessary evil, given the ridiculous valuations of many of the dot-com equities at the peak of the era. Even more concerning, it is well-known that a majority of the BTC holders are “whales” who control most of the available BTC:
According to Bloomberg, about 1,000 so-called “whales” control 40% of the bitcoin in circulation, giving them unrivaled leverage over the broader market. And because there are no laws explicitly banning collusion in digital currency markets, only the most blatant pump-and-dump operations risk being prosecuted as fraud.
Notably, this is not all that dissimilar from the equity markets:
While the concentrated holdings of the modern bitcoin market should give potential investors pause, in some ways, it’s not all that different from the modern equity market. As we pointed out back in September, the Bank of Japan owns a staggering 75% of the domestic ETF market. Increasingly, equity ownership in the US and around the world is becoming increasingly concentrated in the hands of central banks, sovereign wealth funds and the largest asset managers like BlackRock, Fidelity and Vanguard.
While crypto markets have been known to be vulnerable to “pump-and-dump” schemes, equities markets are also known to be rife with fraud, and that is before you even mention insider trading. It is important to note that the 1990s saw the rise of not just the dot-com bubble, but of Enron, MCI Worldcom, and Tyco, to name just a few. Even if “whales” are artificially manipulating the cryptocurrency markets, it can just as easily be argued that central banks and corporate greed have produced the same effect in the equities markets.
One thing all but certain: a massive retracement in the cryptocurrency sector is coming, and possibly long overdue. Who knows what the catalyst for a massive retracement will be – it could be anything from a hack at a major exchange, to government regulation/intervention, or one of those so-called “whales” selling a large amount of currencies, triggering a race for the exits.
Whatever you do, tread carefully before you buy, sell, or short anything that is overvalued, especially in the extremely volatile cryptocurrency space…
…because the valuations can become far loftier and the bubble can grow far bigger before it bursts.
Note: In the short amount of time that this article was written in, BTC went from trading above $18,000 to below $17,000. Take note – whenever the bubble bursts, it will likely happen before you have a chance to sell. Owners truly must HODL, and be prepared for the consequences of their investment decisions.